Getting access to financing isn’t what stops businesses from successfully scaling up. That said, keeping your finances under control isn’t always easy when your business enters a high growth phase.
Almost every scale up business faces two major challenges: choosing the right financial experts and the most apt financing to meet their needs.
When should I bring in financial staff?
The size and scale of your organisation should determine what kind of financial expertise you pursue. In the start-up phase, you may need just a bookkeeper who handles invoicing, staff salaries, and bills. However, as you grow, you will likely need someone with considerably more knowledge and the ability to take a big-picture view of your finances.
These are rarely skills that founder and entrepreneurs have, which means that you likely will want to employ a part-time (or fractional) Finance Director as you approach the 25 employee mark, and eventually a full-time Finance Director when you turn over as much as £5-10m a year.
There are no specific rules about how this process works, but you will need to be financially literate enough to determine, based on your KPIs, when it’s time to upgrade.
This can sometimes be a source of conflict, as stakeholders don’t always want to reinvest their profits into the business. If this becomes a major issue – and you can’t create meaningful cash flow from your business operations as your team grows – you may not yet be ready to scale up.
What should I do when I need external financing?
At some point, almost every scale up business needs a source of outside funding to grow. Start-ups often rely on friends, family, and high net worth individuals they may know, but scale ups often need to sell more equity or take on debt.
Why choose equity?
Equity doesn’t have to be repaid, but it has the potential to significantly impact both your control of the company and the culture of your business. This truly depends on how much of the company you sell, and how much control outside individuals have in your business.
Bringing in VCs, especially those who have invested in businesses like yours, can give you needed guidance, focus, discipline, advice, and expertise. They will likely want to be staked in your business for at least three to seven years, and will aim to make the business more valuable quickly while you work together. It may also give you access to talent who would otherwise be outside of your budget.
You should be wary of the fact that to attract large investors, you may need to give up a large chunk of your company. Though the outside investor may not hold control, they may ask for a significant say in how the business operates.
If all sides are in alignment, this isn’t an issue, but it is absolutely vital to conduct due diligence and ensure that both sides understand each other’s expectations and ambitions. Ending equity arrangements can be expensive in terms of both money and time, so issues in this field can lead to major problems.
If your scale-up business isn’t focused on bringing in maximum returns at all time – or has a somewhat “non-commercial” set of values, you should especially be certain that your outside financing isn’t solely focused on bringing in maximum returns as quickly as possible.